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18 November 2014

Pensions Perspective: what happens if my estimated earnings are wrong?

I am self-employed and my accountant has suggested making a pension contribution based on my estimated earnings for this tax year. What happens if my estimated earnings are wrong? On a secondary issue, I have limited spare liquidity as the majority of my capital is invested in a separate share portfolio. I do not want to miss out on the ability to make a contribution, but I do not want to cash in my shares to create liquidity, especially as my pension scheme funds are held within the same share portfolio. Is there a way round this?

In specie pension contribution rules do mean that it is possible to place certain assets into a pension scheme as an in specie contribution and some investors may wish to look to house their share portfolios within the wrapper of their pension scheme.

Provided that the gross contribution is no more than 100% of earnings, you will receive tax relief at your highest rate. Basic rate tax relief would be reclaimed by your pension scheme, and any higher rate tax relief via your tax return.

A 40% taxpayer would therefore have 20% tax relief paid into the pension scheme and receive the extra 20% via their tax return. This does mean that you will have additional cash within your scheme which you can use to purchase additional shares for yourself, look at alternative investments and/or help to cover scheme costs.

Any share purchase will be subject to stamp duty, and the personal sale or in specie movement of shares will trigger a personal capital gains tax liability.

Before the provider can accept the contribution, they must have written confirmation (an application) from you which details the value of the contribution you wish to make. You should be aware that the date of the contribution is the date of irrevocable disposal, in other words, the date of the stock transfer form. The application creates a legal debt and there can be tax implications if the value of assets is more or less than the monetary amount stated in the application.

Personal contributions are restricted to 100% of earnings, and you will also be limited to the annual allowance plus any carry forward allowance you may have.

You should check your estimated earnings with your accountant before making a contribution, and revisit the calculation after your accounts have been completed. Of course, as we approach the end of the tax year these figures should be more accurate. However, in cases where excess contributions over earnings are inadvertently made we can refund any excess including refunding tax to HM Revenue & Customs. Alternatively, we can convert the excess contributions into a temporary member loan to the scheme and then convert that to a member contribution in the following tax year.

Pension Perspective is a weekly feature from City Trustees, covering questions that our experienced sales and technical teams have received from advisers. The Q&A covers a range of subjects including property, pension contributions, protection, auto-enrolment and more.

City Trustees operates a free technical helpline for advisers for support with pension challenges. Tel: 0116 240 8731 or email: technicalhelp@citytrustees.co.uk.